Wednesday, September 29, 2010

Yesterday's Market

The treasury market has been in a decent rally the last two days, largely as the result of successful auctions:

The Treasury Department sold $35 billion in 5-year notes at a yield of 1.26%, the lowest on record at an auction. It was also smaller yield than traders had anticipated, one indication of strong demand.

The amount sold was the smallest since May 2009, which also helps demand metrics look more positive.

Bidders offered to buy 2.96 times the amount of debt being sold, compared to an average of 2.8 times at the last four monthly sales of the securities.

In addition, consider these charts of the daily price action of the IEFs and TLTs:

The IEFs are still right below the long-term trend line. Remember that on the other side of bonds is yield which should act as a natural brake on prices. But -- we're not seeing that.

In addition, notice the long end of the curve is above the long-term trend line.

On the daily chart, prices are still above key resistance (a), buy have broken the uptrend (b).

For the last few days, prices have mostly been in a very tight range.

Prices opened by moving lower yesterday (a) on higher volume. Prices consolidated once (b) about half-way down before hitting their low for the morning (c). The MACD signaled a reverse (which the 3/10 MACD also revealed a bit sooner). Prices rallied to previously established lows (f), consolidated gains (g) and then had a small rally (h), which was pretty quickly reversed (h). The sell-off reversed into the close and prices rallied on increasing volume into the close.

The dollar has formed a head and shoulders formation for the first part of this year. It caught a safety bid during the euro crisis (the head) but has since moved lower. With the Fed keeping interest rates low for the foreseeable future, expect this trend to continue. Remember that with a decreasing dollar comes higher commodity prices.